When you use a IRA, you typically think you’re limited to investing in stocks and bonds. But when you self-direct your IRA, the game changes. You can handle all sorts of different investments when you take more control over your IRA, including the full gamut of what the IRS allows. You can’t hold collectibles like wine and art, but you can carry out transactions like loans. But what are the risks and rewards of an approach like this? And how should you approach it with a Self-Directed IRA administration firm to make sure you cross all your Ts and dot your Is?

Before you jump in, it’s essential to understand both the rewards and risks of this type of investment strategy.

The Rewards of Hard Money Lending with a Self-Directed IRA

1. High Interest Rates

One of the biggest rewards of hard money lending is the potential for high returns. Since these loans are often typically riskier than traditional bank loans, borrowers are willing to pay higher interest rates. As a lender through your Self-Directed IRA, you can benefit from these elevated rates. If you’re earning more money in interest rates than the typical cost of cash in the economy, you can generate cash flow into your IRA with ease—and it’s almost entirely passive.

2. Consistent Cash Flow

Hard money loans are usually structured with monthly interest payments. This means your IRA can receive consistent cash flow throughout the term of the loan. For investors looking to generate steady, predictable income in retirement, this can be especially appealing. It also offers an opportunity to reinvest those payments into other assets, compounding your returns.

3. Collateralized Investments

Another benefit is that hard money loans are secured by real estate. For example, let’s say a borrower defaults. Your IRA could potentially take ownership of the property, which gives you a safeguard against total loss. While this doesn’t entirely eliminate your risks, having collateral can give you added protection and peace of mind. In some cases, the value of the property might even exceed the loan amount.

4. Diversification

Hard money lending means you can diversify your portfolio beyond traditional assets like stocks and bonds. This reduces your exposure to market volatility, which is especially useful during stock market turbulence. A steady income into your IRA thanks to loans can give you a hands-off investment that add stability to your overall risk profile.

The Risks of Hard Money Lending with a Self-Directed IRA

1. Borrower Default

The most significant risk of hard money lending is borrower default. What if the borrower fails to make payments? Then your IRA may be forced to foreclose on the property. While this is one way to recoup your investment, foreclosures can be a lengthy and costly process. There’s also no guarantee that the property will sell for enough to cover the loan amount, especially if the real estate market takes a downturn.

2. Liquidity Issues

Loans are typically illiquid investments. Unlike stocks or mutual funds, which you can sell quickly if there’s an emergency, hard money loans are long-term commitments. You’ll need to wait until the loan is repaid or the property is sold to access your funds. If your IRA is heavily invested in hard money loans, this lack of liquidity could pose challenges. That’s especially true if you need to take required minimum distributions (RMDs) in retirement.

Want to know more about the potential role of lending within a Self-Directed IRA? Now’s the time to reach out; give us a call at 866-7500-IRA at American IRA today.